Why You Should Worry About A Bitcoin, Crypto Bubble

John Wasik
, ContributorOpinions expressed by Forbes Contributors are their own.

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My back hairs go up when I see an unregulated financial vehicle that few really understand. When it comes to cryptocurrencies, I have a lot of concerns.

Although I understand the concept behind Bitcoin-like currencies, there's always an issue with how something involving money is regulated. With public companies, for example, you know exactly how many shares are outstanding and what they are worth.

Cryptocurrency values are subject to coding. Blockchain is certainly a worthwhile technology, although I don't think it's as transparent as it should be.

Don't get me wrong. I like the fact that alternative currencies don't need banks as intermediaries. Banks have certainly done their fair share of mucking up the world financial system.

Yet bank rules have never been tougher in the wake of the 2008 credit meltdown. That's a good thing. Cryptocurrencies are on the other side of that fence. They certainly need some regulation to curb bubbles, scams and crashes.

Regulators are at odds over how to regulate Bitcoin and other cryptocurrencies, though. The U.S. Securities and Exchange Commission, an agency that's never been known for its strict regulation, has no guidelines. The Commodities Futures Trading Commission, in contrast, may green light futures trading on Bitcoins.

Where does that leave you, the individual investor? Well, you have to trust the encryption software and market participants that they are pricing cryptocurrencies correctly.

Are some investors driving up the price to speculate? I think that's a fair bet, although that's a problem in any market.

How do you know if Bitcoin or similar currency is in a bubble? Since thousands are entering the market every day and Bitcoin is being "mined" around the world, it's hard to tell. There have been massive sell-offs and there's more irrational exuberance than knowledge ruling that market.

Bitcoin recently passed the $5,000 mark and is up more than 700% as of last week. I even saw an ad that offered a Bitcoin for a magazine subscription. Merchants are beginning to accept them in transactions.

Prof. Robert Shiller, the Nobel Prize-winning economist who's one of the world's experts on manias and bubbles, recently weighed in on the Bitcoin narrative in MONEY magazine:

"It starts with Satoshi Nakamoto—remember him? The mysterious figure who may or may not be real. He’s never been found," Shiller said.

"That has a nice mystery quality to it. And then he has this clever idea about encryption and blockchain and public ledgers, and somehow the idea is so powerful that governments can’t even stop it. You can’t regulate this. It kind of fits in with the angst of this time in history."

To Shiller, to follow the money -- and track a bubble unfolding -- you need to follow the popular narrative and certain telltale statements:

-- This time is different. Yes, cryptocurrencies are unique because they are created through blockchains. But does that make them immune to human nature? I doubt it.

-- Greed and Fear Don't Apply. Well, I don't know when that's ever been the case. Although computers around the world are monitoring encrypted transactions, it won't block out speculators.

-- The idea is bulletproof. And they said that about tulips, swampy real estate in Louisiana/Florida and tech stocks. Blockchain will change the world in its own way, but it won't curtail greed, which overrules common sense. And crashes will happen.

-- Bubbles Can't Be Seen in Real Time. I've heard a lot of economists say this. The last one was Alan Greenspan, who refused to say there was a credit bubble in 2006-07. We all know what happened in 2008.

I'm not saying that you shouldn't invest in cryptocurrencies, just treat them like the volatile vehicles they are.

Would you load up your entire portfolio on tech stocks or mortgage derivatives? If the answer is no, then I think you'll have some degree of protection against the next bubble bursting.